IT firms USD revenue growth seen up 0.5-4% QoQ in Apr-June

The April-June quarter US Dollar revenue growth is expected to rise on the back of the Rupee depreciation. However, margins gains, if any, will be limited due to the wage hikes taken by companies.

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IT firms USD revenue growth seen up 0.5-4% QoQ in Apr-June

The April-June quarter US Dollar revenue growth is expected to rise on the back of the Rupee depreciation. However, margins gains, if any, will be limited due to the wage hikes taken by companies.

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The April-June quarter is seasonally a strong quarter for software services exporters and this time around the sharp depreciation in the Rupee provides additional boost. However, the US immigration bill still remains an overhang for the sector.

Analysts expect IT companies to report a 0.5-4.0 percent quarter-on-quarter growth in the first quarter, helped by the rupee depreciation. However, the currency tailwinds will not necessarily push up margins due to the wage hikes announced by companies, apart from higher visa costs.

Further, the companies are also likely to use the forex gains to boost sales and marketing and take steps to reduce impact of the US immigration bill, which will further limit margin expansion.

"The sharp Rupee depreciation of 9 percent year-to-date is supporting the relative performance despite the immigration overhang. We expect benefits to only partially flow through as companies are likely to use the benefit for sales and marketing, mitigation of impact of the immigration bill and investments in new service lines and clients are likely to ask companies to pass back some of the gains," said Citigroup analysts Surendra Goyal and Rishi Iyer.

Among the top companies, the Citi analysts expect Infosys and HCL Technologies to report a relatively muted quarter.

On the other hand, Ankur Rudra and Nitin Jain of Ambit Capital expect HCL Tech to lead with a 3.8 percent growth in its fourth quarter revenue, while Wipro 's growth will be slowest at 0.2 percent.

Among the tier-I companies, the Ambit analysts expect EBITDA (earnings before interest, taxes, depreciation and amortization) margin of HCL Tech and Infosys to be flat and Tata Consultancy Services ' margin to contract 121 bps due to full quarter impact of wage hikes.

"Given the thumb rule of margin gains of 30-50bps from every 1 percent Rupee depreciation, Indian IT services firms have the opportunity to re-invest some part of these gains to gain market share and increase penetration in underpenetrated markets such as continental Europe," Rudra and Jain said.

They expect part of the margin gains will be invested in sales and asset heavy deals, which will lead to higher revenue growth from FY15.

DEMAND OUTLOOK KEY

Demand environment was weak in several markets last year and clients postponed discretionary spends amid the global economic downturn. This year, the environment remains mixed. Accenture last month cut its revenue growth guidance for the current year to 3-4 percent from 5-8 percent earlier.

Industry body NASSCOM has guided for the industry to grow 12-14 percent in FY14. While TCS, India's largest software services exporter, has said it will beat NASSCOM guidance, Infosys, after its fourth quarter earnings, guided for a 6-10 percent growth this year.

TCS is expected to maintain its line of growing ahead of NASSCOM forecast. However, analysts are divided on whether Infosys will retain its guidance.

Rumit Dugar and Udit Garg of Religare Capital Markets feel Infosys will maintain its guidance. However, the Ambit Capital analysts expect the Bangalore-based company to lower its guidance to 5-9 percent. The company had stopped issuing quarterly guidance last year citing economic uncertainties.

Infosys, which has been a laggard in the sector over the last one year, reappointed Narayana Murthy as its head last quarter and the street has high hopes from him to turn things around.

The street will also closely monitor guidance from Infy's local rival Wipro, which provides quarterly guidance. The Religare analysts feel Wipro could guide for 1-3 percent quarter-on-quarter US Dollar revenue growth in the second quarter.

"We continue to reiterate our stance that TCS' and HCL Tech's revenue growth will outperform Infosys and Wipro in FY14; however the differential is likely to reduce considerably at the exit rate of Q4," said Sandip Agarwal and Omkar Hadkar of Edelweiss Securities.

STOCK WATCH

Since March-end, the IT sector has underperformed the broader markets. The CNX-IT index has slipped 8 percent during the period, compared with the NSE Nifty index, which is up 2 percent.

Edelweiss has a "buy" rating on the top four players, with Wipro, HCL Tech, Infosys and TCS the order of preference. HCL Tech, Infosys and MindTree are Citi's "preferred picks."